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This question is from the bpp exam kit question 46. i’ve managed to caluclate the target cost of $96, but I dont understand in the answers where we need to remove the $46 variable cost from $96. Do we assume that the variable cost per unit will always stay the same and the only way we could reduce cost is on the fixed cost ?
A company has a target mark up of 25% and sells into a competitive market where the market price is $120
per unit. The company’s current costs per unit are $46 for variable costs and $60 for fixed costs, and it has
a budgeted output of 10,000 units.
What is the minimum production required to close the target cost gap?
A 11,778 units
B 13,636 units
C 11,042 units
D 12,000 unitsThe variable cost per unit must stay the same unless you are specifically told different in the question.
The total fixed costs will not change (they will stay at $600,000) by definition, but the fixed cost per unit will change depending on how many units we produce. So for a fixed cost of $50 per unit, we need to produce $600,000 / $50 = 12,000 units.
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